a Interst rate Compensating balance Effecitve rate 8.25% 20% 10.3125% Other altenative Interest 500000*9.75% 48750 Add service charges 5500 Total cost 54250 Effecitve rate 10.85% Compensating balance loan has the lower effective interest rate b monthly rate .0825/12 0.01 Annuity per month 400000/11.48 34843 Total payment 34843*12 418116 Total interest 18116 Rate 4.53% c Discount lost cost .015/.985 0.02 Discount lost per day0 Annual rate of discount lost 13.71% Yes Company should take loan because the cost of borrowing is 10.3125% and company should avail the discount as the cost of not taking discount is more which is 13.71%

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Unformatted text preview: d Discount lost cost .015/.985 0.02 Discount lost per day Annual rate of discount lost 7.83% No now the cost of not taking discount is 7.83% which is less than borrowing. e Interes= 500000*10.25% 51250 Effective rate=51250/400000 12.8125% f Effective rate with increase 12.8125% Effective rate without increase 10.3125% Difference 2.5000% Cost of hedging= 12000/500000 2.40% The cost of hedging is less than the cost of increase in prime factor therefore hedging is profitable....
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